Gundlach on Today’s Surprising Driver of Bond Prices
September 16, 2014
by Robert Huebscher
David Einhorn's Greenlight Capital returned -2.9% in the second quarter of 2021 compared to 8.5% for the S&P 500. According to a copy of the fund's letter, which ValueWalk has reviewed, longs contributed 5.2% in the quarter while short positions detracted 4.6%. Q2 2021 hedge fund letters, conferences and more Macro positions detracted 3.3% from Read More
Inflationary pressures could ultimately trigger an uncontrollable spike in interest rates, according to Jeffrey Gundlach, but such predictions are likely at least five years too early. In the short run, he identified the key driver that will keep rates low – the strong performance of European bond markets.
Gundlach said it is “overwhelmingly tempting” for European and Japanese investors to buy U.S. Treasury bonds, which yield considerably more than their non-U.S. counterparts. The U.S. 10-year bond, for example, yields 150 basis points more than German bonds with similar maturities.
Deflation and recession in major economies in Europe is driving European bond rates lower, Gundlach said.
“Buying from foreign buyers has been more than sufficient to offset any amount of so-called tapering that has happened from the Federal Reserve,” Gundlach said.
International buying of Treasury bonds, he said, is up by $600 billion year-to-date versus last year.
Fed policy will keep rates low, he said. “I’m virtually certain that Janet Yellen does not want to raise interest rates,” Gundlach said. Recent easing by the European Central Bank (ECB) will add further support European bond prices.
Gundlach spoke Sept. 9 on a conference call with investors. He is the founder and chief investment officer of Los Angeles-based DoubleLine Capital.
A copy of Gundlach’s presentation is available here.
Let’s look at Gundlach’s assessment of the global bond market.
The driver of the U.S. bond market
U.S. bond-market investors have benefited from remarkably strong performance and low volatility this year. The yield on the 30-year bond, for example, has fallen 73 basis points. Gundlach said that bonds have delivered the third-best year-to-date performance in the last 40 years and that downside volatility – spikes in interest rates – has been exceptionally rare.
That performance is remarkable, he said, given the high level of bearish sentiment at the beginning of the year.
He expects low yields to persist, despite the fact that rates are already low.
U.S. rates are being “dragged down” by European bond yields, he said. “Who would want to sell U.S. bonds and buy European bonds when you’re giving up so much yield?” Gundlach asked. A strong dollar makes U.S. bonds even more attractive, he added.
In his previous webcast, Gundlach predicted that the budget deficit would decrease, limiting the supply of bonds, and that pension plans would step in to buy bonds in order to lock in gains and secure their funding. Those factors have played out, he said, and will remain in place – although he noted that short interest in bond positions among pension funds is at a high level.
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